Using an Old Screen to Shift Through Value Names and Find a Few Nuggets

 | Mar 13, 2017 | 8:56 AM EDT
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Near the tail end of the 2000-era tech boom, a couple well-known value managers separately told me they at times had wondered whether value investing had gone the way of the dinosaur. During that time, investors paid richly for companies with little or no revenue or earnings as long as those companies in some ways were related to technology or the Internet.

It was believed at the time that classic metrics such as price/earnings multiples, book value and even cash flow no longer mattered. It was a new era, with new metrics, and the old, antiquated measures of determining a company's value were useless.

That sentiment persisted for a couple years, much longer than many thought it could. I remember being amused by my colleagues' latest ideas of investing in companies with no revenue but fancy names and great prospects for success. But some of them made money on these ideas, which made no sense to me, as I continued to troll the markets for value. Indeed, there were a lot of historically cheap companies at the time, but because my archaic definition of cheap was no longer relevant, those names languished. That was until the bubble burst. Then value made a comeback, and it became clear that it was not dead after all.

Approaching 20 years later, the concept of value is alive and well, but there simply isn't much of it available in the markets. Much of what is there, at least in the world of small value, is in some way distressed. But no matter what, you have to keep turning over rocks, looking for something of interest.

This weekend, I turned back to a screen that I have not used in several years. It combines the concept of identifying companies that may be cheap on measures of both earnings and book value.

Screening criteria include the following:

  • Market cap greater than $100 million
  • Tangible book value per share less than 1
  • Enterprise value/EBITDA less than 10
  • No banks or financials

The initial screen produced 20 names, and I'll be further scrutinizing that list in the coming weeks. Perhaps not surprisingly, they are all small names, with the largest market cap at just $1.4 billion. There are a couple very familiar names, including boating retailer West Marine (WMAR) and FreightCar America (RAIL) , which I've written about frequently. WMAR currently trades at 0.74x tangible book value and 4.5x EV/EBITDA, while RAIL trades at 0.66x tangible book and 4.7x EV/EBITDA.

Another name I've written about is crude oil transporter Gener8 Maritime (GNRT) , which currently trades at just 0.3 X tangible book value and 7x EV/EBITDA. The stock had a very rough 2016, down more than 50%, but has rallied nicely since early December. Earnings estimates for 2018 are all over the map, but the consensus is calling for earnings per share of $.51, putting the forward P/E at 10. However, with such variability in the seven analysts' estimates, there's a lot of room for surprises, positive or negative. Add in the industry GNRT operates within, and it could make for a wild ride.

More to follow.

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we like this chart here, it appears ready to move higher. BOUGHT BZUN OCT 35 CALL AT 3.40
Large-cap, high-quality McKesson (MCK) is too cheap now, at $147.51 or so. The stock hit $243.60 more than 2.5...



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